Comment on Turner Report into UK Pensions
Future pensioners face a stark choice according to the recent Turner Report on the need for pension reform in the UK. Outlining the findings of the report, Lord Turner said the choice was between a higher pension age or the state pension becoming “meaner and meaner”.
One of the main recommendations of the report is a gradual rise in the retirement age from 65 to 68 by 2050. The proposals, if implemented, would go a long way to averting a future pensions crisis. You may be asking what is at the root of the problem?
Basically, people are living longer. While a typical 65 year old man can today expect to live a further 19 years, by 2050 estimates suggest a 65 year old would live a further 24 years.
As Lord Turner pointed out when presenting his report: “The key thing is the principle – [the state pension age] has to go up in line with life expectancy.” And the number of over 65 year olds compared to the working population is growing rapidly. So a combination of more over 65’s and living longer will mean a falling retirement income relative to average earnings.
You may be wondering whether these changes will happen soon and whether your retirement plans will be affected. Firstly, remember these are just proposals, with Lord Turner suggesting 2010 as a start date. Significantly, any rise in retirement age would require 15 years notice so that the over 50’s are not affected.
How exactly will things be different to now? Firstly, let’s remember that currently someone with full entitlement to the basic state pension age gets £82.05 a week. For a single person, this can be topped up to the minimum income guarantee of £109.45.
As things stand you can only do this if you have very little or no savings and claim the extra pension credit. If the existing link of the basic state pension to inflation remains, the number of pensioners relying on means testing would increase from 30% to 70% by 2050. Clearly, this will act as a huge disincentive to long term additional voluntary saving.
The Pensions Commission proposes to increase the basic state pension in line with inflation until 2010, and thereafter link increases to earnings. Lord Turner sees the State Second Pension (formerly SERPS) which is linked to earnings, continuing to contribute in overall pension planning. And for those who contracted out of the scheme the option would be to increase rebates which can be invested in private pensions.
If the commission’s recommendations were to become law, there would be a universal “citizens” pension, based on residency. In today’s money, this would be £75 and not based on contributions. Added to this, the State Second Pension would provide a further £53 a week, giving £128 a week (just under 30% of average earnings).
The third important building block in future pension planning is the proposed “Britsaver” National Pension Savings Scheme. The commission reckons that someone on average earnings contributing to a Britsaver over a working life would get between an extra £66 and £80 a week, bringing the total up to £200 a week.
Individuals would, of course, be free to top up their savings with additional voluntary contributions. The Turner proposal sees employees contributing 4%, the employer 3% and 1% would be in the form of tax breaks, making a total 8% of earnings. While employees would be enrolled automatically, there would be the option of opting out.
So how will all this affect you? If you are over 50 and these proposals are actioned, you are most unlikely to be affected. While for those between 40 and 50, you will get the state pension at 66, and have the option to invest in the Britsaver from 2010.
If you are aged between 30 and 40, you would be entitled to the state pension from 67 and have up to 30 years in which to fund a Britsaver account. For those of you in your 20’s there is maximum room for planning. You are likely to receive the state pension at 68 or perhaps 69, however, your pension should be worth more.
With the time value of money, someone in their 20’s funding a Britsaver would receive at least £200 a week in total. And remember there is still the opportunity for individuals to build on these basic building blocks with extra investment in other pensions savings vehicles. In this way you can build extra future income streams and work towards a secure future in retirement.
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